The worlds of captive insurance agencies (those who represent one insurer exclusively) and independent agencies (those who represent multiple insurers) are, in theory, separate. A captive signs a contract agreeing to sell only the products of the one insurer. These captive agencies typically get financial support to help launch their agency and must adhere to a stricter contract that limits them writing with that insurer. Independent agencies make no such promise.
In practice, the lines are not nearly so distinct. It may not be an everyday occurrence, but there are some captive agencies under common ownership or management with independents.
Dirk Beamer, an attorney who advises trade associations that represent captive agents, says these arrangements are fairly common. The fact that two members of the same family are operating both captive and independent agencies is not a problem if the captive agent refers to the independent business that his carrier does not want. It becomes a problem when the captive gives the independent business that his carrier would write.
“(These arrangements) should never happen,” says David Colvin, National Director of Business Development for Premier Group Insurance (PGI), an agency network based in Colorado. “Does it happen in today’s world? Absolutely. Should it happen? Absolutely not.” A captive agent who enters into such an arrangement is violating the contract they’ve signed.
Colvin believes it is unethical for a captive agent to set up an independent agency in the name of a spouse or family member. It runs counter to the spirit of the captive agency agreement, he argues.
And there can be adverse consequences should the carrier find out. Brian Casner, Business Development Manager for PGI and a former captive agent himself, tells the story of a man who was a captive agent and who started an independent agency in his wife’s name. The two agencies operated out of the same office space and used the same phone number. He moved more than $1 million in premium to the independent agency and was binding coverage for the independent carriers. When the captive insurer found out, they entered his office unannounced, shut down the captive agency, and sued their former agent and the independent agency. His wife ended up selling the independent agency under duress.
Beamer says captive carriers have become more aggressive in terminating their agents for cause, such as when they learn that an agent is playing both sides. They have a large financial incentive – they avoid paying commissions by making a termination effective immediately. In some cases, they also claw back bonuses.
How to avoid problems? “Don’t violate the terms of your agency agreement,” Colvin says. PGI will not do business with a captive agent until the insurer has formally released them from the contract. Agents who are unsure of what their contractual obligations are should seek legal advice.
Colvin and Casner say there is a right way to go about this – keep the two agencies separate. Separate locations, separate phone numbers and email addresses, separate employees, separate tax I.D. numbers, and so on. Casner knows a captive agent who set up his sons with an independent agency, but the sons bought their own leads and ran their business apart from their father.
Beamer advises captive agencies to have an explicit policy for referring business to other agencies. They should also have multiple agencies to whom they refer business, not just one. He also cautions that most captive carrier contracts prohibit their agents from receiving payment for those referrals.
“It’s fine to have somebody else within the family have an independent agency,” Beamer says, “but not where you’re anticipating a model where there’s just back-and-forth sharing of clients.” The captive agent forming an independent should focus on building up a new book of business, not taking clients from the captive carrier.
Any captive or independent agency considering starting an agency on the other side of the fence must do so carefully. Keep the businesses and the books of business separate. Otherwise, the agent may find himself engaged in litigation that can ultimately cost him both businesses.